Magazine

Commentary: Will This Merger Go Down Smoothly?

February 20, 2005

With the Feb. 1 vote by Adolph Coors Co. (RKY) shareholders to approve the merger with Molson Inc., the extended courtship between the two companies came to an end. But the hard work of making the merger succeed is just beginning. The company's new heft is supposed to give it more muscle to deal with the shrinking market share in its two home markets and a more competitive global beer industry. Rapid consolidation, combined with the growing threat of wine and spirits, has made it difficult for smaller players to make it on their own. Nevertheless, the terms of the deal may saddle the new company with major management problems. The two family-dominated partners structured it as a merger of equals. In the executive suite and the boardroom, that means neither side is clearly in charge. Such co-leadership structures seldom work. And family control of both companies -- with all the history, pride, and expectations this implies -- creates additional complications.

On paper, the deal looks like a smart move. Molson Coors Brewing Co. will be the world's fifth-largest brewer, with $6 billion in sales. While that's not enough clout to go head-on with goliaths Anheuser-Busch Cos. (BUD) and InBev (ABV), it does reduce the risk. Coors Light accounted for half of Adolph Coors's earnings; for Molson Coors, that brand's bottom-line impact is about 20%. "The merger doesn't fix the company's core problems," says Marc I. Cohen, an analyst at Goldman, Sachs & Co. (GS) "But it makes each of the problems they face less significant."

A Volatile Mixture

Except for one. Mergers of large, publicly held, family-dominated companies have been rare, and with good reason. Powerful personalities, intra-family rivalries, and the inevitable battle for control make such unions difficult -- in the words of management guru Tom Peters, "virtually unthinkable." For Molson Coors, avoiding those problems may be the most critical challenge of all. If the two families clash, the resulting management mayhem will make taking on their bigger, better-positioned rivals all but impossible. And conflict may be inevitable. Even the company concedes that meshing the two companies will be difficult. "Each culture has relative strengths and weaknesses, and we need to pull the positives from each," says Coors CEO W. Leo Kiely III, who will be CEO of the combined company. "It's going to be hard and challenging work."

By structuring the deal as a "merger of equals," the two sides may have created a power vacuum that leaves both families jockeying for dominance. M&A history books include few such deals where both companies triumph; one side always comes out on top. DaimlerChrysler (DCX) claimed the union of the two auto makers was a merger of equals. That fiction was quickly scrapped amid management turmoil caused by colliding U.S. and German corporate cultures and financial failings at Chrysler. A similar outcome could await Molson and Coors. "Family companies operate like monarchies," says Kenneth A. Preston, professor of management and entrepreneurship at New York University's Leonard N. Stern School of Business. "It's really difficult to have a merger because somebody has to be in charge, and that can be a problem."

The board structure won't make corporate unity any easier. Molson shareholders end up with a slight edge in shares -- 55% vs. 45% for the Coors owners. But that won't necessarily give them more control. Coors's Kiely becomes CEO, while Molson's CEO, Daniel J. O'Neill, moves into the executive position of vice-chairman. Most important, the board will be split equally between the two families. In addition to Kiely and O'Neill, it will include five members elected by the Molson family, five by the Coors family, and three outside directors elected by Class B shareholders.

Already named to the new board: Molson Chairman Eric H. Molson as chairman, and Andrew, his son -- plus Coors Chairman Peter H. Coors and Melissa, his daughter. Kiely has been credited with reviving Coors, in part by shifting the focus from products to marketing, a process that Pete Coors, great-grandson of the founder, has shepherded. O'Neill, a former H.J. Heinz exec, has focused Molson on cutting costs and building core brands, while the Molson family has kept a low profile.

With power so evenly divided, it's not hard to imagine inter- and intrafamily battles. Merger partners, such as those that formed Time-Warner Inc. (TWX) in 1989, have had much the same experience even without the complicating factor of family. The family members at Molson Coors could make for a volatile mix. Industry observers say Peter Coors, who recently lost his Senate race, may want to exert his influence; and R. Ian Molson, a large shareholder and distant cousin of Eric Molson, has been a harsh critic of the merger. Susan F. Shultz, CEO of Board Institute Inc., a corporate governance services firm, says the even split between the two families could create gridlock. Says Shultz: "If there is an impasse at the board, [one family] can block the whole venture."

Despite the inherent problems of merging two family-controlled companies, the Molson Coors deal has a few things in its favor. For one, Coors management has successfully integrated acquisitions with similarly strong cultures. In 2002, the Rocky Mountain brewer acquired a portfolio of brands that included Carling, the No. 1 lager brand by sales in Britain, which still retained a strong family-company culture. The integration wasn't seamless. But it worked, in part because Coors embraced some of Carling's innovations, such as its sales tactics in bars.

Furthermore, Coors and Molson share some history. Molson brews Coors for the Canadian market, and Coors sells Molson in the U.S. And both companies have been run by nonfamily managers for at least a decade, which should help with integration. Still, it won't be an easy mix. Family turmoil is one ingredient sure to make this merger go flat.